Friday, December 18, 2009

My husband and I have decided to pay off all our debts ASAP and "live like no one else so we can live like no one else," as Dave Ramsey likes to say.

We are fairly fortunate. Other than my enormous student loan and our mortgage, we are in decent shape debt-wise: 3 credit cards (fairly low amounts), some medical bills and a car payment. We are planning to have all of it paid off by June, at which point we will start hitting the student loan hard.

This article gives me yet another reason to want to get out of debt and stay there.

This credit card's interest rate is 79.9 percent.

The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It's a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card's credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit -- $75 in the first year for a credit line of $300. But the new law doesn't set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.

This article brought several points to mind.

First and foremost, it's simply idiotic to use credit cards. Save the money and buy the thing with cash. When you buy the thing, it will be yours. You won't have to worry about missing a payment, falling behind in payments, or screwing up the payment. Moreover, when you use cash to buy things, you tend to be a little more prudent. So, the 200 bucks you might be willing to spend on clothes with your credit card starts to seem foolhardy when it's your hard-earned money going for it.

Secondly, notice the law of unintended consequences at work here. New federal regulations requiring that credit card fees total no more than 25% of the card's credit line comes back to bite consumers in a different place. The credit card company still intends to make its money. It just has to do it with an outrageous interest rate rather than with fees.

This is just one example of what happens when government decides to intervene in the marketplace. Companies and individuals want to make money, and they really don't like when the government tries to interfere with that. So, any time the government slaps a regulation (or tax) on businesses, they just find ways around the regulations. And pass the price on to consumers.

I'm not advocating companies fleecing customers. But as the article states, this bank services customers with terrible credit and hence high risk. The bank knows that there's a good chance that many customers will default, so they figure that cost into the cost of doing business. In this case, the cost is either $256 in yearly fees or 79.9 APR.

Liberals hate these kinds of businesses that serve the poor and uncredit worthy. So, they like to create lots of regulations for these companies: limitations on fees, or disclosure statements, curbs on advertising or other practices. But the poor and uncredit worthy need lenders, too. The difference is that if someone is a poor credit risk, companies that want to stay in business have to figure in the risks of loaning to these people (and the risk is very high that the company won't get paid). So, as the regulations affect one way to stick it to customers, companies just find different ways.

This is why I don't want to use credit anymore. It is, after all, a choice we all get to make.

Recent Comments

Endorsements! (Idea Stolen from Dana)

"She’s that sad creature called the sister punisher/colluder---a woman who hopes that if she hates women even more than the men in her life, she gets to be “better” than other women. A fool, in other words, unaware that the sexist men she loves so much think she’s a joke." -- Amanda Marcotte

"You really are one of the biggest pricks I've encountered on the web" -- Jeromy Brown

"You’re a cartoon caricature of the Limbaugh ditto-head" --Mike G

"You are a sadist, a fool, *and* a liar" -- Phoenicians in the Time of Romans

"Yours is the mark of an absolutist who is never wrong, always right" -- Perry